The costs of material and labor are the most important factors that cause the residential construction cost index to rise or fall. These two factors are influenced by multiple other factors, including demand for residential construction, technology and competitiveness in the market.
Variation in the cost of materials impacts the residential construction cost index. Material and labor costs are weighted to form the index. According to the Census Bureau, the cost of materials is directly related to the residential construction cost index. Thus, an increase in material costs drives up the index. The cost of construction materials depends on factors in both the local and global market, as high global demand drives up the price of materials in the local market. Changes in the price of the elements that make up materials, such as the costs of renting construction equipment, have similar effects on the index.
Variation in the cost of labor also impacts the residential construction cost index. Changes in the regulatory environment, worker productivity and labor supply in the construction industry affect the cost of labor, and in turn the index. The minimum wage is an example of a regulatory initiative that drives up the price of labor. High worker productivity reduces the overall cost of labor. Factors that affect worker productivity, including technology and skills, also impact the cost of labor.